Analysis and criticism of America's most prominent public intellectual and champion of Keynesian economics. I am part of the Austrian School of Economics, and I critique Krugman's writings from that perspective.

Pages

Thursday, August 4, 2011

Wrong and wrong

Paul Krugman seems to have a need to claiming time and again that he is right and everyone else is wrong, and his "proof" is that interest rates did not go up as predicted by the editorial writers at the Wall Street Journal (thus, giving us the overworked "bond vigilantes" phrase). He also constantly invokes his "confidence fairy" line, but has not given proof of its lack of veracity -- except to use the term with the idea that his constantly saying it "proves" it is true.

His newest pen pal, Bruce Bartlett, seems to have gone over to the Keynesian side, and now he has David Frum to join him. I have linked Frum's mea culpa article for those who wish to read it.

However, there are a number of people who also have been wrong, people that Krugman never will acknowledge because he already has attacked them as being wrong and stupid all of the time: the Austrians. For example, in 2001 -- that's right, 2001 -- Ron Paul on the floor of the U.S. House of Representatives declared that the Fed was in the process of engineering a housing bubble. However, since Rep. Paul subscribes to a theory that Krugman claims is no more credible than the "phlogiston theory of fire," then nothing Ron Paul says should have any veracity at all. (In Krugman's world, only Keynesians are right and everyone else -- even those that are right -- are wrong.)

Keep in mind that Krugman already has declared that the U.S. Government is not "broke," even though borrowing now is now out-of-control. Of course, Krugman's latest "scheme" is for the government to borrow obscene amounts of money, spend it, with the idea that the resulting spending will give the economy "traction" to move on its own. There is no causality other than Krugman's circular belief that spending will begat spending which will begat prosperity. In other words, he actually wants us to believe we can spend ourselves into prosperity.

Let us address his "confidence fairy" phrase for a minute. According to Krugman, business "confidence" is based solely on what business owners and managers perceive to be future spending. If someone will spend, business will build. Robert Higgs, however, notes that not only is Krugman wrong, economically speaking, but he also is contradicting his own guru, John Maynard Keynes:

The humor columnist for the New York Times, Paul Krugman, has recently taken to defending his vulgar Keynesianism against its critics by accusing them of making arguments that rely on the existence of a “confidence fairy.” By this mockery, Krugman seeks to dismiss the critics as unscientific blockheads, in contrast to his own supreme status as a Nobel Prize-winning economic scientist.

The irony in this dismissal, as others, including my friend Donald Boudreaux, have already pointed out, is that Krugman’s own vulgar Keynesianism relies on a much more ethereal explanatory force for its own account of macroeconomic fluctuations–namely, the so-called animal spirits. The master himself wrote in The General Theory: “Thus if the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die. . . . [I]ndividual initiative will only be adequate when reasonable calculation is supplemented and supported by animal spirits. . . .” (p. 162). Because Keynes conceived of his “animal spirits” as “a spontaneous urge to action rather than inaction” (p. 161), he of course had no way to explain their coming and going or to measure or evaluate them in any way. They are as surreal as a ghost–when and why they come and go, no man knows or can know. Such is the force that drives the ups and downs of private investment in Keynesian economic theory, and such theory unfailingly drives Krugman’s commentaries on the recession and on the possibility and effective means of recovery from it.

Since Krugman's "confidence fairy" line is aimed at Higgs' "regime uncertainty" view, I include what Higgs says about it:

Regime uncertainty, however, has a much more grounded basis. In my own research on the topic, I have presented evidence derived from (1) a mass of testimony by investors, businessmen, and other contemporaries, (2) voluminous historical facts on the character of government actions that reasonable people had every reason to interpret as theatening the security of their private property rights, (3) variations in the structure of investment, especially as between short-term and longer-term projects, and (4) specific twists in the term-structure of returns on private corporate bonds, as well as other relevant evidence on the behavior of financial markets.

As against this varied and substantial evidence, what does the proponent of animal sprits have to offer? Well, nothing at all. The idea is purely fanciful, the product of Lord Keynes’s fertile imagination.

So, this is what we have:

Keynesians are right and Austrians are wrong (because Krugman says so)

The Keynesians "doctrine" of "animal spirits" also is wrong because it contradicts Krugman's view of business confidence

But Keynesian doctrine is right, even if it is not right.

So, there you have it. Krugman now is depending upon David Frum, a guy who long ago rejected anything to do with free markets and peaceful relations between people as being desirable, to validate his own Keynesian opinions. You just cannot make up this stuff.

The fiasco in Europe makes the dollar appear more attractive in comparison to the euro which helps prop up the U.S bond market. Not to mention the size of the Fed’s balance sheet is enough to suppress yields even if they don’t actually engage in more QE. So Hulsman’s take on what bond yields were going to do over a year ago, has no bearing on this situation whatsoever because those factors had'nt really come into play yet. (The situation in Europe has intensified since then) In my opinion at least.

I just don’t see how the Keynesians have any credibility nor can I see how they can actually believe the stuff the advocate. With unprecedented levels of both fiscal and monetary stimulus, huge debt and deficits, all they can say is, we want MORE!!! As if more of something that didn’t work, will somehow “work” by doing more of it. Even though we have been doing more of it.

Taking a bucket of water from the shallow end of the pool and dumping it into the deep end of the pool won’t raise the water level no matter how big the bucket is. Same goes for “stimulus.” Try telling a Keynesian that.

"I just don’t see how the Keynesians have any credibility nor can I see how they can actually believe the stuff the advocate. "

My conclusion is that Keynesian economics does and is doing exactly what it was intended to do by the people who came up with it: benefit certain parties at the expense of other parties.

The Keynesian flocks believe that the wizard is an all powerful, all knowing being while the Austrians believe it is just some guy behind the curtain.

Regardless of who is right or wrong it all ends up being a distraction from the real issue which is that it is accomplishing what it was meant to do and that has been extremely bad for one of the two aforementioned parties and very good for the other.

Krugman makes one clear claim in the post you link; that the WSJ claimed the stimulus would drive up interest rates and he claimed it would do no such thing. Tellingly you offer nothing that shows the Austrian view was correct and his was wrong. You merely insult Krugman for criticizing Ron Paul. More importantly, since the time of the WSJ prediction said 10-year rate peaked around 4%, dropped to around 2.5% a bit over a year later, back up to 3.7% and now we're headed back down. So what will Austrians say now? I'm sure it's the Fed's fault as usual.

The point is the austerians, driven in my view by the Austrians, are winning the policy wars in the US and the Eurozone and the global economy will pay the price. As things grow worse the austerians will say we must do even less. If you think that position will fly in the US with 10%+ unemployment then you are grossly mistaken. The worse it gets the more people will favor intervention. I would prefer a more moderate course, but at this rate you might as well just hand the socialists the Congress right now. Then maybe they'll at least take the blame this cycle.

Assume you are driving a car at an average speed of 100 mph straight towards a brick wall. You have no intention of changing direction. Does the fact you have not yet hit the wall invalidate the prediction you are going to crash?

Zack is spot on about the size of the Fed’s balance sheet and the effect the flow and reinvestment activity now has on rates. There are a number other elements as well but the end result is that at present, the Treasury market is not a free efficient market. However, that which is not sustainable will not be sustained.

Krugman does not portray honest score of his running feud with the WSJ.

Wall Street Journal 2010/10/23:When one country devalues its currency, others tend to follow suit. As a result, nobody achieves trade gains. Instead, the devaluations put upward pressure on the prices of commodities such as oil. Higher commodity prices, in turn, can cut into global economic output. In one ominous sign, the price of oil is up 8.7% since August 27.http://blogs.wsj.com/economics/2010/10/23/number-of-the-week-big-boost-from-dollar-decline/

Krugman on the WSJ post:Urk.

Why do dollar commodity prices tend to rise when the dollar falls? Because other countries buy commodities too, so that a constant dollar price would mean a fall in terms of other currencies. To a first approximation, in fact, you’d expect commodity prices to remain constant, other things equal, in terms of a GDP-weighted basket of currencies around the world.

So yes, a fall in the dollar tends to raise the price of oil in dollars — but it also tends to reduce the price of oil in euros. A fall in the euro tends to raise the price of oil in euros, but reduce it in dollars. So what would devaluations that raise commodity prices in terms of all currencies look like? I have no idea.

There is, I think, a tendency to think of devaluations as reductions in the value of currencies relative to something external and eternal — and hence as making us all poorer. But the reality is that my depreciation is your appreciation, and vice versa; we can’t all devalue at the same time.http://krugman.blogs.nytimes.com/2010/10/23/the-worst-economist-in-the-world/

Not only was Krugman hilariously wrong in saying that that “we can’t all devalue at the same time” and that he had “no idea” what commodity prices rising in terms of all currencies would look like, he entitled his post “The Worst Economist in the World” (the first of a regular series, he pledged). Needless to say, Krugman has discontinued that series.

No, Krugman doubled down in his second (and final) "Worst Economist in the World" installment:

What I didn’t do at the time was take on a related argument — which wasn’t made in that article, but I knew was out there — which said that expansionary monetary policy in general leads to higher commodity prices, and therefore hurts recovery. Sure enough, we’ve got a senior official at the International Energy Agency saying "QE2 could inflate prices in nominal terms and bring about inflation and could derail the recovery".

So, how hard is this? Higher commodity prices will hurt the recovery only if they rise in real terms. And they’ll only rise in real terms if QE succeeds in increasing real demand. And this will happen only if, yes, QE2 is successful in helping economic recovery.

Commodity prices rose in real terms without an economic recovery, just like Krugman said wouldn't happen. He could not have been more wrong on QE2 than he was.

Commodities going down now does not refute the fact that they went up with QE2.

Commodities will go up again when QE3 comes.

And...forgot to include the link associated with the last post, so all can read for themselves how incredibly wrong Krugman was:http://krugman.blogs.nytimes.com/2010/10/27/the-worst-economist-in-the-world-102710/

Why is it that there are no Austrian critics who have the slightest familiarity with Austrian concepts? For the 55,123rd time, general price inflation is a secondary effect of money dilution and isn't even the primary focus of the ABCT. Further, the housing bubble and its associated distortions have not yet deflated back to reality so it is possible for various prices to still collapse while others are inflated by new funny money. What is so hard to understand about this (other than statists being pathetic anti-intellectual Epsilon-minus semi-morons)?

Further, the issue for the day is Higgs' very specific factual and realistic description of uncertainty vs. Keynes’ phony and amorphous unsubstantiated musings about uncertainty. Where Austrians have very specific real-world facts, Keynesians ooze unsubstantiated and baseless musings totally divorced from any logical theory much less any real-world substantiation.

Wow. Krugman was as wrong as he could possibly be about commodity prices only rising if real demand increased -- which he has stated did not! I think anytime someone brings up Krugman's supposed great predictions, this should be brought up. Something as basic as this shows how clueless the guy is.

Can't you just imagine Krugman in a similar position in the 1970s saying that it wasn't possible for inflation and unemployment to rise at the same time?

About Me

I teach economics at Frostburg State University in Frostburg, Maryland. We are located on the Allegheny Plateau, and we have cool summers and tough winters.
I am the single father of five children, four of them adopted from overseas and I have two grandchildren. My family and I are members of Faith Presbyterian Church (PCA).